THE TAX ATTIC with Jerry Coon

Congress is using new tactic

 

It goes without saying that our tax system is very complicated. Our Congress helps to make that system more complicated when they pass laws that are not first and foremost tax laws. Buried within those non-tax laws, however, are tax provisions; sometimes very complicated tax provisions.

Jerry Coon

The most glaring example of late is the Health Care Reform bill passed last year. In many ways, Congress tied Health Care Reform directly to the tax code. For example, all taxpayers will eventually be required to buy a health insurance policy. If a health insurance policy is not purchased, the taxpayer may pay a penalty on his/her tax return. The “may” part comes into play because if the taxpayer’s income is low enough, there won’t be a penalty. The taxpayer’s final out-of-pocket cost for the policy itself will also be tied to his/her level of income as reported on the tax return. The lower the income, the lower the taxpayer’s final cost of insurance. Congress has just given another incentive to keep total income down.

A second example is the provision that requires all businesses to file 1099s to all other businesses from which they buy at least $600 of goods and services. I’m not exactly sure at this moment what filing 1099s has to do with Health Care Reform. What I do know is that if this provision is not repealed, an additional 40,000,000 form 1099s will have to be filed and will be clogging up an already overburdened tax system. Businesses will be paying for those additional 40,000,000 forms to be prepared and filed.

We all know that businesses don’t pay taxes or for tax preparation—consumers pay those costs. Tax and tax preparation costs are just another part of the cost of doing business that a business simply passes on to the buyer of the product. When these types of costs go up, our costs go up as consumers. It’s a thought to keep in mind two years from now when this particular provision kicks in.

A third example is the provision that requires all charge card companies to report to the IRS all transactions for all taxpayers. If you sell one item on e-bay and accept a credit card payment, that transaction will be reported to the IRS. Congress even invented a new form for this reporting, the 1099-K. The 1099-K will detail credit card payments made to each taxpayer on a per-month basis with an annual total. However, I have to ask the question: What does Health Care Reform have to do with reporting charge card transactions?

Actually, this provision should scare a good many taxpayers who regularly sell items they have purchased on e-bay or one of the other online auction houses, but do not report those sales on their tax return. At some point, those regular sellers have developed into a business, but it is not being reported as a business. If this 1099-K provision stays on the books, it will be interesting to see how many taxpayers really do have these types of businesses.

Ultimately, by coupling these three tax provisions with a non-tax goal of having everyone buy health insurance, Congress has placed a tremendous burden not only on taxpayers to comply with those provisions but also on the Internal Revenue Service to enforce the compliance of those provisions. The price of noncompliance will cause taxpayers to pay a penalty or a tax. The IRS, as always, is charged with determining if there is noncompliance. This will be a big job. By most common estimates, the IRS will have to hire over 16,000 additional employees to do this job. I trust Congress budgeted some money to update the IRS’ computer operating system, too, so it can handle those 40,000,000 1099s as well as the influx of e-bay businesses.

It’s not uncommon for Congress to use the tax code to encourage social programs. We have had residential energy credits for many years now to encourage the purchase of energy-efficient products. We have credits to encourage setting up wind turbines, for purchasing hybrid vehicles, and for installing geothermal heat pumps. We have the deduction for real estate taxes and mortgage interest paid that encourage home ownership, and we had the first-time homebuyer credit just last year that encouraged non-homeowners to buy homes.

What is different with the three provisions I discussed above is that they are compliance provisions and not encouragement provisions. Congress is using a new tactic and I don’t think we are going to like it. This is Jerry Coon signing off. 

Jerry Coon is an Enrolled Agent. He owns Action Tax Service in Rockford. Contact Jerry at www.actiontaxservice.com.

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